This post is by Darren Woolley, Founder and Global CEO of TrinityP3. With his background as an analytical scientist and creative problem solver, Darren brings unique insights and learnings to the marketing process. He is considered a global thought leader in optimizing marketing productivity and performance across marketing agencies and supplier rosters.
So, when is a full-time equivalent resource in your agency retainer, not a full-time resource? It seems like a redundant question. Of course, a full-time retained resource is full-time. But if that is the case, why are there advertisers who have full-time retained resources who are unavailable to take a call? Or even worse, why are there advertisers paying additional hours for someone who is full-time on their account?
In fact, the issue is not as clear-cut as this. Because agencies are more likely to have resources partly on your account, or allocating a percentage of their time on your account, or – even – having several people with the same or similar job titles making up the full-time equivalent on your account. It gets confusing very quickly – and that’s the point. The more confusing it is, the more likely you are to end up paying for something you have either already paid for or don’t need to pay for.
What is a full-time equivalent (FTE)?
Let’s start with a simple, straightforward example. You hire someone for a week to do a job. They agree to work 7 hours a day for 5 days and you agree to pay $50 per hour. That is $1,750 for the week. But it takes them an extra hour of work a day to get the job done. Are you going to pay them an additional $250 for the work done?
Now, let’s say you hire someone through a company. They quote you 7 hours a day for 5 days but now with an overhead and profit margin on top making it $80 per hour. This means it is now $2,800 for the week. But again, that person ends up working extra time to get the job completed. Except for this time, it is an extra 2 hours per day or ten hours extra for the week at $80, which means you have a bill for an additional $800. Do you pay for it?
What if you find out that the person doing the work is not paid for their overtime and is only getting $1,750 for the week? The company they work for gets $1,050 and is now claiming the additional $800, meaning they make $1,850 from your job. Does this make a difference?
Working beyond the week
Let’s expand this job and engagement beyond a week to the whole year. Would you expect that person to work on public holidays? Would you expect them to work when they are sick? Would they be allowed to take a holiday? Would you expect them to work weekends? You may not expect the agency staff to work these hours. In fact, the agency will say they have calculated the fee based on 100% of the individual’s salary, multiplied by the overhead recovery and profit margin and then divided by the number of billable hours per year to get the effective hourly rate.
But if you are covering 100% of their salary and the person works more hours during the year, are you responsible for paying overtime? The truth is most agencies, unfortunately, suffer from a culture that encourages overwork. This means agency staff feel compelled to work overtime. Unpaid overtime. So, as part of the culture of the agency, if the individual you are paying to work on your business 100% of the time does ten per cent more hours, is that something you should pay?
Let’s use an example. The agency has calculated annual billable hours as 40 hours a week (8 hours a day by 5 days a week) for 48 weeks per year. (This allows two weeks leave and another two weeks of public holidays and the like.) That is 1,920 hours per year. The agency staff start at 9 am and no one leaves the office before 7 pm at night. That calculates as 2,160 hours per year or 12.5% more. Of course, all those extra hours in the agency go onto the timesheet for your account because you are the only client paying that person.
But you paid for 100% of that FTE. That FTE could work 1,920 hours. They could work 2,160 hours. They could work 2,340 hours a year if they take no holidays and work every public holiday. It is still 100% of an FTE. Right?
It gets messy with a percentage
But what if the person under the retainer is covered for just 60% of their time? This means that in any given week they work three out of five days on your business, throughout the year. This is neat because it suggests they are working Monday to Wednesday on your business and the rest of the week on someone else’s account. But it is never that clean.
No, they work a few hours here. A few more hours there. A couple of hours this day and fewer on that day. Some weeks they do not do 60% of their time on your business and other weeks they do more than 60% of their time on your business.
When you call, they are always in a meeting for the other client they work on and will get back to you. It feels like they are working more for other clients than they are for you. But that cannot be right because you have 60% of their time covered.
When you add up all the hours they have placed on your timesheet for working on your business, it comes to 1,152 for the year. That comes in at 60% of the total billable hours for the year. But what if they actually worked 2,160 hours for the year? Then the 1,152 hours is only 53% of their time working on your business. Does that mean you deserve a rebate on their time? After all, if they worked 60% of the 2,160 hours (1,296), the agency would say that is 144 hours more than the original number of hours for the year and therefore would expect the advertiser to pay for this time.
But the agency does not pay the person working this time any additional pay. There is generally no overtime paid to agency staff. This is perhaps why there is a culture in most agencies that supports working long hours for no additional pay. The only people that benefit from this culture are the agency owners, as unpaid overtime is an opportunity to bill the client reported additionally worked hours. This payment, of course, goes straight to the agency’s bottom line as profit.
Solving the problem
There are a few problems here that can be solved relatively simply. For advertisers, it is about getting what you paid for and avoiding paying more. But indirectly, it is about no longer supporting a system that encourages overwork and burnout amongst agency staff. In many ways, the two go hand-in-hand. The payment for time and resource system is flawed.
The ideal solution is to move away from this approach and link the agency fee to the product of the relationship. Measure the outputs of the agency for your business and consider the agency costs as a measure of the value of those outputs. This is an output pricing model.
The agency will still need to keep timesheets to track and manage the resources used. But by paying for outputs and not the cost of the hours the agency staff work, you are no longer incentivising the overwork and burnout of agency staff.
TrinityP3’s Agency Remuneration Agency Remuneration and Negotiation service ensures that the way in which you pay your agency is optimal. Read more here